The Health Insurance Portability and Accountability Act
By Jill S. Gilbert
The Health
Insurance Portability and Accountability Act of 1996 (the Act) 1 contains a combination of incentives and
penalties to encourage seniors to self-insure rather than rely upon
eligibility for Medicaid by using divestment alternatives. The Act
discourages divestment with a combination of unprecedented criminal
sanctions and income tax incentives to encourage the purchase of
long-term care insurance. This article outlines the Act's provisions
that affect the senior long-term care industry.
While the Health Insurance
Portability and Accountability Act of 1996 seeks to encourage seniors to
self-insure rather than divest assets, well-informed individuals
possibly still may accelerate their eligibility for Medical Assistance
benefits without incurring criminal penalties. |
The Act contains three main provisions aimed specifically at the
long-term care issue: 1) criminal sanctions for specific types of asset
transfers to accelerate Medicaid (Title XIX) eligibility; 2) deductions
for premiums and tax exempt status for long-term care insurance
benefits; and 3) an expanded definition and liberalized standard for
categorizing long-term care services as deductible medical expenses
pursuant to section 213 of the Internal Revenue Code (IRC). The Act also
provides that payments received from viatical settlements 2 and accelerated life insurance benefits 3 paid to someone who is terminally or
chronically ill may be excluded from income.
Criminal sanctions for divestment
Section 217 of the Act enhances previously existing Medicaid fraud
provisions by including any person who:
"[k]nowingly and willfully disposes of assets (including any transfer
in trusts) in order for an individual to become eligible for medical
assistance under a State plan under Title XIX, if disposing of assets
results in the imposition of a period of ineligibility for such
assistance." (Emphasis added.)
The legislation, despite technical problems in the drafting, purports
to impose a penalty of up to five years in prison, a $25,000 fine or
both. Attorneys may be found liable for aiding and abetting their
clients in carrying out the proscribed asset transfers.
The Health Insurance
Portability and Accountability Act of 1996 contains a combination of
incentives and penalties to encourage seniors to self-insure rather than
rely upon Medicaid. |
This legislation was effective Jan. 1, 1997. The provision passed
without hearings, debate or press coverage. President Clinton has
specifically asked Congress to repeal it.4
It is vehemently opposed by the American Association of Retired Persons
and the National Academy of Elderlaw Attorneys, a subsidiary of which
the American Bar Association has approved as the certifying entity for
elderlaw attorneys. 5 Supporters of the
legislation include the long-term care insurance and nursing home
industries.
It is unclear as to which types of transactions actually are
prohibited by section 217, and various theories have been advanced. 6 The statute identifies any transfer that
"results in a period of ineligibility" for Title XIX benefits. A period
of ineligibility, or penalty period, is defined specifically by section
14.5.0 of the Wisconsin Medical Assistance Handbook. 7 This period is the number of months for which
an individual will be ineligible to receive Medicaid benefits subsequent
to making a transfer of assets. The period of ineligibility (penalty
period) is determined by "dividing the divested amount ... by the
average nursing home cost to a private pay patient ($3,334)" to arrive
at the number of months for which an individual in a nursing home will
be ineligible for Medicaid benefits. 8 For
example, a divestment of $33,340 by an institutionalized person would
result in a 10-month period of ineligibility. 9
Controversy centers on Act section 217's use of the term "imposition"
with respect to a period of ineligibility. Using the example above, if
an institutionalized individual were to apply for benefits 11 months
after making the $33,340 transfer, the individual would be eligible for
benefits pursuant to the criteria in the Wisconsin Medical Assistance
Handbook. Hypothetically, there would be no "imposition" of
ineligibility. However, if the same individual applied for benefits only
nine months after making an identical $33,340 transfer, the individual
would be administratively deemed ineligible.
The relevant question then becomes whether use of the word
"imposition" contemplates that administrative denial of benefits is
necessary to bring a transfer within the scope of section 217. If this
is the case, the position of the National Academy of Elderlaw Attorneys
is that the Act penalizes only those who apply too soon after making a
transfer of assets, and does not proscribe transactions by those who
simply wait out the specified penalty period. 10
Perhaps the most
significant (and least publicized) provisions will prove to be those
that expand the scope of services traditionally deductible as medical
expenses under section 213 of the Internal Revenue Code. |
Even assuming that the "imposition" language of section 217 is to be
given a sweeping interpretation, there are alternatives available to
individuals who wish to accelerate eligibility for Medicaid without
falling prey to criminal sanctions. For example, asset transfers, other
than those made to a trust, that occurred more than 36 months before an
individual applies for Medicaid are deemed to be outside of the
"lookback" period. 11 Such transactions are
not considered in assessing an institutionalized applicant's eligibility
for Medicaid. Consequently, there should be no resulting period of
ineligibility that would bring these transactions within the scope of
section 217. However, this is of little comfort to individuals who
cannot afford to pay for nursing home care privately for 36 months
following a transfer of assets.
Another strategy pursuant to which assets possibly may be transferred
without exposure to criminal liability is based upon section 15.5.2 of
the Medical Assistance Handbook. This section specifies that in
calculating a period of ineligibility (penalty period), any number
resulting in a fraction will be rounded "downward." For example, a
transfer of $2,184 would result in a 0.7-month period of ineligibility
($2,184 divided by $3,334). The 0.7 would be rounded downward, resulting
in a penalty period of zero months. Accordingly, transfers of less than
$3,334 per month, in theory, result in no penalty period and fall
outside the scope of section 217.
Other strategies involve the transfer of resources in excess of the
Medicaid resource limitations in exchange for products or services. The
excess resources must be transferred for "fair market value." Such
transfers are not considered divestments since the definition of a
divestment is "a transfer for less than fair market value."12 For example, an annuity may be purchased,
so long as the annuity's duration does not exceed the Medicaid
applicant's actuarial life expectancy. An annuity having a duration
longer than the applicant's life expectancy will be deemed a transfer
for less than fair market value since the applicant cannot reasonably be
expected to recoup the investment value.13
Purchases of assets that are "exempt" or are not counted against the
Medicaid resource limit also may accelerate eligibility.14 Examples of exempt assets include a home in
which a Title XIX recipient or the recipient's spouse resides, vehicles,
life insurance policies having a cash surrender value of less than
$1,500, household effects and personal property, and burial plans and
spaces.15
Contracts for services to be compensated at fair market value
(including those provided by family members) also would appear to fall
outside the scope of section 217. 16 These
purchases are not divestments so long as the service provider is not
compensated at a level greater than the fair market value for those
services.
Favorable income tax treatment for long-term care insurance
premiums and benefits
The Act adds a new section to the Internal Revenue Code 17 that provides favorable tax treatment for
premiums paid for "qualified" long-term care insurance policies.
Generally, long-term care insurance benefits paid by an employer will be
treated as a nontaxable fringe benefit.18
Policy premiums paid by individuals will be deductible within specified
limits based upon the individual's age at the close of the taxable year.
For 1997 these limits 19 are:
Age |
Limit |
40 or less
50-60
60-70
over 70
|
$200
375
2,000
2,500
|
The further requirement that a policy be "qualified" so that premiums
may be deductible will be met if the policy:
1) provides that Medicare-covered expenses are not reimbursed, other
than deductible and co-pay costs;
2) has no cash surrender value;
3) is guaranteed renewable;
4) complies with certain minimum disclosure requirements; and
5) provides benefits when a policyholder cannot perform at least two
of the six "activities of daily living."20
This provision is unlikely to be meaningful to most elderly taxpayers
since they already must have sufficient other deductible expenses to
exceed the standard deduction amount. Taxpayers age 65 or older are
entitled to an additional standard deduction. 21
Additionally, this type of deduction is categorized as a medical
expense, and such expenses are deductible only to the extent that they
exceed 7.5 percent of adjusted gross income. 22
Deductibility of long-term care expenses
The Act's most significant and innovative aspects are the provisions
permitting deductibility of long-term care expenses. Prior law required
tax practitioners to determine whether a service or facility was
"medical" in nature thereby qualifying as a deductible medical expense
under section 213 of the IRC. Under the Act, determinations as to
whether expenses qualify as deductions now focus on the extent to which
a taxpayer is disabled.
Newly added IRC section 7702B(c) defines long-term care services as
those that are "necessary diagnostic, preventive, therapeutic, curing,
treating, mitigating and rehabilitative services, and maintenance or
personal care services." The services must be provided pursuant to a
plan of care provided by a physician or other licensed health
practitioner. Generally, this will involve a determination that an
individual is chronically ill and requires assistance with two or more
of the six activities of daily living. 23
|
Jill S. Gilbert, DePaul 1984, is a CPA with an
LL.M.-Taxation. She concentrates her practice in estate planning. She
has been certified as an elder law attorney by the National Academy of
Elderlaw Attorneys, the certifying entity approved by the
ABA. |
This provision promises to have the most pervasive impact on seniors.
For those who require long-term care, the expenses are substantial and
ongoing and exceed the required 7.5 percent of adjusted gross income as
well as the standard deduction amount. 24
The Act eliminates the need for tax professionals to categorize
supportive services as "medical" and garner support for such a position.
Thus, an anomaly under prior law, where the identical expense might be
deductible when paid to a nursing home but not deductible when paid in a
home health setting, is removed.
Conclusion
The Health Insurance Portability and Accountability Act of 1996
contains a combination of incentives and penalties to encourage seniors
to self-insure rather than rely upon Medicaid. However, the
controversial criminal provisions, even if not repealed, do not
effectively foreclose asset transfers by well-informed individuals who
seek to accelerate their eligibility for Medical Assistance benefits.
Similarly, the provisions for deducting long-term care insurance
premiums are likely to have little financial impact. Perhaps the most
significant (and least publicized) provisions will prove to be those
that expand the scope of services traditionally deductible as medical
expenses under section 213 of the Internal Revenue Code.
Endnotes
1 P.L. 104-191, 8/21/96.
2 Viatical settlements essentially
are transactions pursuant to which terminally ill persons sell the right
to receive benefits under a life insurance policy to a third party. The
requirements for excluding the proceeds from such transactions are found
in IRC section 101(g).
3 IRC §101(g).
4 "Congress Urged to Repeal New Law
on Medicaid Assets Disposal," New York Times, page 1, col. 4.
Feb. 14, 1997.
5 Id.
6 Criticism of section 217 has
included ambiguities in the drafting and First Amendment issues, both of
which are beyond the scope of this article.
7 The Wisconsin Medical
Assistance Handbook is the resource relied upon by state agencies
in processing applications for benefits. It is published by the State of
Wisconsin Department of Health and Social Services Division of Economic
Support.
8 Medical Assistance
Handbook, Appendix, §14.5.2.
9 The average nursing home cost,
currently set at $3,334, is redetermined annually by the Department of
Health and Social Services. Wis. Stat. §49.43(3)(b)(2).
10 NAELA Legislative Alert
and Update, August 1996.
11 Medical Assistance
Handbook section 14.3.0 provides:
"The lookback period is a period of time prior to application or
entry into an institution. A divestment that has occurred in the
lookback period can cause the applicant or recipient to be
ineligible.
"The lookback period for divestments not involving trusts is 36
months."
12 Medical Assistance
Handbook, Appendix, §14.2.1.
13 Medical Assistance
Handbook, Appendix, §14.11.0. However, an annuity with a
payment period that exceeds the life expectancy of a Medical Assistance
applicant will be deemed a divestment.
14 Medical Assistance
Handbook, Appendix, §14.8.0.
15 Medical Assistance
Handbook, Appendix, §§11.7.3, 11.6.8, 11.6.5, 11.6.1,
11.8.2, 11.4.4, 11.4.5, 11.4.2.2.
16 Medical Assistance
Handbook, Appendix, 14.8.0.
17 IRC §7702B.
18 IRC §7702B(a)(1).
Long-term care benefits provided under "cafeteria" and "flexible
spending" arrangements will continue to be taxable. IRC
§§1259(f), 106(c).
19 IRC §§7702,
213(d).
20 The six activities of daily
living are eating, toileting, bathing, dressing, continence and
transferring (for example, from the bed to a chair or toilet).
21 IRC §63(c)(3).
22 IRC §213(a).
23 Supra.
24 IRC §213(a).
Wisconsin Lawyer